The exchange rate between EURO and the US dollar has reached parity, which means the two currencies are now equal in value. This is the first time that this has happened in twenty years.
The euro was worth $1 on Tuesday, down around 12% from the year’s beginning. High prices and the unpredictability surrounding the energy supply brought on by Russia’s invasion of Ukraine have fuelled widespread fears of a recession on the continent.
The European Union is working to minimize its reliance on Russian oil and gas, which accounted for about 40% of its gas supply prior to the invasion. In addition, Russia has reduced the flow of the Nord Stream pipeline to Germany by 60%, reducing gas supply to some European Union countries.
One of the crucial pieces of the European gas import infrastructure has been closed because of the planned maintenance for ten days. Officials in Germany are worried that it might not be turned on again.
It is questionable if the European Central Bank will be able to battle inflation since the energy crisis is combined with an economic slowdown. As the European inflation rate stands at 8.6%, the ECB indicated that it would raise interest rates for the first time since 2011, said the reports.
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The price of imports surged dramatically last week as a result of rising gasoline prices and general supply chain disruption, which led to Germany recording its first goods trade deficit since 1991.
“Given the nature of Germany’s exports which are commodity-price sensitive, it remains hard to imagine that the trade balance could improve significantly from here in the next few months given the expected slowdown in the eurozone economy,” Saxo Bank foreign exchange strategists said.
Analysts predict that the US dollar will become a shelter for investors as a result of a string of aggressive interest rate increases by central banks and slowing economic growth. This will continue to put pressure on the euro.
The US Federal Reserve has increased interest rates by 75 basis points and has signaled that additional rate rises will occur this month, placing it far ahead of Europe in terms of tightening.
Deutsche Global Head of FX Research George Saravelos warned that this safe-haven rush to the US dollar could become much more acute if both Europe and the US experience a recession.
Saravelos wrote, “if both Europe and the US find themselves slip-sliding in to a (deeper) recession in Q3 while the Fed is still hiking rates.”
This could be bad news for global economic stability.